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Suppose absolute purchasing power holds true between two countries, Home and Foreign, and the price level increases 4 % in Home and it decreases by
Suppose absolute purchasing power holds true between two countries, Home and Foreign, and
the price level increases in Home and it decreases by in Foreign.
a What happens to the price of Foreigns currency in terms of Homes currency?
b What is the real exchange rate, defined as the price of one unit of the foreign basket of goods
in terms of units of the domestic basket of goods?
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